In today’s newsletter, independent digital asset commentator Dumpling Bullish writes about the growing influence of bitcoin’s derivatives stack on its price.
Then, on Ask an Expert, ML Tech’s Leo Mindyuk answers questions about the evolution of bitcoin investment products.
– Sara Morton
Bitcoin Price Discovery: It’s No Longer Just a Demand Story
For most of its history, bitcoin had a simple price logic: limited supply, rising demand, and occasional panic in between. That logic still exists. He’s just not running the show anymore.
What’s running the show now is the derivatives stack sitting on top of the asset.
From the spot market to the leverage system
Over the last decade, bitcoin has transitioned from a predominantly spot-driven market to a layered derivatives ecosystem. Futures, perpetual swaps, options, exchange-traded funds (ETFs), structured products and prime brokerage loans have transformed the way pricing occurs.
CME futures launched in December 2017, giving institutions a regulated and scalable way to short bitcoin for the first time and providing a mechanism to express bearish opinions at the top of what had been a 19x rally. The asset saw a drop of 80%. That didn’t kill bitcoin. It allowed disagreements to be assessed more efficiently.
Then came the ETF approvals for 2024, which acted as the foundation for a new layer of derivatives within the US equity markets.
Each addition did not change what bitcoin is. It changed where and how its price is discovered.
Three variables that now matter more
Real yields and the strength of the dollar set the macroeconomic context. Bitcoin has increasingly been marketed as a high-beta liquidity asset and when global risk appetite contracts, it sells off alongside stocks and other risk assets, regardless of what the blockchain is doing.
Bitcoin 30-day moving correlation with Nasdaq (QQQ), 2011 – present
Source: New coverage
Positioning in derivatives tells the short-term story. CME open interest and perpetual funding rates reveal whether a price movement is based on genuine new demand or leveraged speculation that will eventually unravel wildly. When funding rates are persistently positive, the market is paying a premium to be long, and that premium is a sign of fragility.
Bitcoin CME futures interest and opening price, December 2017 – present
Source: CME Group via TradingView
ETF options mechanisms have introduced a new transmission channel. When institutional investors purchase call or put options on the iShares Bitcoin Trust ETF (IBIT), traders selling those options must hedge by trading the underlying ETF and, in some cases, related futures or spot exposure. This coverage is procyclical. When Bitcoin rises, traders must buy more; when it falls, they must sell. Modest directional movements are mechanically amplified. The result is that a significant portion of Bitcoin’s short-term volatility is now generated primarily by the structure of the stock market.
Financialization is not extinction
Gold offers a useful parallel. The development of futures and ETFs did not eliminate the gold shortage. It integrated gold into global macro portfolios and amplified its volatility during liquidity cycles. Bitcoin is undergoing a similar integration process at a faster pace. It is being absorbed into the global risk budgeting system. This absorption provides institutional capital, liquidity and legitimacy. It also brings correlation, reflexivity, and occasionally violent relaxation driven by forces that have nothing to do with protocol.
The scarcity remains intact at the protocol level. But its influence on the price is increasingly subordinated to the cost of capital and the mechanics of the set of derivatives. Bitcoin is not losing its scarcity narrative. It is gaining an identity of liquidity.
Scarcity anchors the asset. Liquidity sets the marginal price.
– Dumpling Bullish, Independent Digital Asset Commentator
ask an expert
Q: In recent years, bitcoin investment products have expanded from spot exposure to futures, options and ETFs. How do you see bitcoin financial products evolving in the way investors access the asset?
The evolution of bitcoin investment products mirrors the path we have seen in traditional asset classes. Early participants primarily accessed bitcoin through direct ownership: purchasing and holding the asset itself on crypto exchanges. Over time, as institutional interest increased, the market began to develop a broader toolset: regulated options and futures, structured products and regulated fund structures, and, more recently, spot ETFs.
This expansion is important because it moves Bitcoin from simply being a speculative asset to something that can be integrated into portfolio construction and risk management frameworks. Different investors have different needs. Some want direct exposure to the asset’s price movement, while others want regulated vehicles, derivatives for hedging, or more nuanced ways to express market opinions.
As the ecosystem matures, financial products make it easier to access Bitcoin through familiar structures, reducing barriers for institutional investors and expanding the ways in which the asset can be incorporated into diversified portfolios.
Q: In traditional markets, financial products often evolve from simple exposure to more complex structures such as leveraged, inverse and derivatives-based strategies. Are we starting to see a similar progression in the bitcoin ecosystem?
Yes, and it’s a natural progression. In most asset classes, markets start with simple spot exposure and gradually develop layers of financial instruments that allow investors to manage risk, hedge positions or express different opinions about the market. Bitcoin is following the same trajectory.
Initially, the focus was simply on gaining exposure to the asset itself. Today, we are seeing a more developed ecosystem that includes derivatives, volatility trading and structured products. These tools allow investors to do much more than simply speculate on price appreciation. They can hedge downside risk, trading volatility, or build market-neutral strategies.
What’s interesting is that crypto markets often evolve faster than traditional markets because the infrastructure is digital and global. As liquidity deepens and regulatory frameworks become clearer, we are likely to see even more sophisticated products emerge that resemble strategies commonly used in the equity, commodities and fixed income markets. For example, I expect growth in several income-generating ETFs: instruments for inverse, leveraged or broader crypto factor-based exposure. Furthermore, we are likely to see enormous growth in the crypto options markets.
Q: With the growth of futures markets and the introduction of spot ETFs, how could the next generation of bitcoin products expand investors’ use cases, whether for hedging, leverage, or more sophisticated portfolio strategies?
Futures markets already allow investors to hedge their exposure or express directional opinions without having to own the asset directly. ETFs have made Bitcoin accessible through traditional brokerage accounts. The next logical step is products that focus on portfolio outcomes.
As that happens, bitcoin starts to look less like a standalone operation and more like a building block of a portfolio. Ultimately, that’s where the market is headed: giving investors the flexibility to express opinions about the market in much more nuanced and sophisticated ways with ease of access.
– Leo Mindyuk, CEO and CIO, Machine Learning Technology
